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Globalisation and its Impact on Indian Economy

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The adoption of the policy of globalisation in India has resulted initially the following mixed impacts on its economy:

(i) Competition:

As a result of globalisation, Indian companies started to face growing competition from free flow of products produced by multi-national companies (MNCs). Unequal competition between the domestic companies and mighty MNCs has resulted closure of weak industrial units both under large, medium and small scale categories.

(ii) Mergers:

Globalisation has resulted growing number of mergers and collaborations of Indian companies with MNCs or TNCs.

(iii) Exports:

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India’s share of world exports has been increasing slowly from 0.55 per cent in 1990 to 0.75 per cent in 1999 and then to 1.01 per cent in 2003. In the current EXIM Policy (2001- 2002), the government has set an ambitious export target of $ 75 billion by 2004-2005 up from the existing level of $ 43 billion in order to capture 1 per cent of the global trade. This would, however, require the exports to grow at the rate of 18 per cent per annum.

(iv) Trade in Services:

As a result of globalisation India has been able to gain in respect of trade in services, especially in respect of Information Technology industry. Indian software professionals have created a brand image in the global market.

(v) Trade Conditions:

Globalisation has been creating an improved condition of trade for agricultural commodities and textiles, especially cotton textiles produced in India.

(vi) India’s Share in World Export of Goods and Services:

It would be better to study the India’s share in world merchandise exports and world service exports separately. The following table (7.8) will clarify the position.

It is observed that during the 13-year period, i.e., during 1990 to 2003, merchandise exports of India increased from $ 17.97 billion to $ 55.98 billion, i.e., at the annual growth rate of 9.1 per cent as compared to that of much higher 16.2 per cent of China, 1 1.4 per cent of Mexico and only 6.1 per cent of the whole world.

Although India could realize some increase in its export growth rate from globalisation but the share of India in world merchandise exports could increase only marginally from 0.51 per cent in 1990 to 0.73 per cent in 2003.

However, the performance of India in respect of service sector exports was comparatively better during the same period. Accordingly, India’s service sector exports increased considerably from $ 4.6 billion in 1990 to $ 37.7 billion in 2003 recording an annual average growth rate of 17.4 per cent as compared to that of 17.4 per cent growth rate attained by China.

However, major position of the increase in services exports was realized from software exports. Thus the share of software exports out of total services exports of India increased from 42.7 per cent in 1990 to 75.9 per cent in 2003.

Again if we add together merchandise and services exports the total exports of India’s goods and services increased from $ 22.58 billion in 1990 to $ 93.7 billion in 2003 showing an annual average growth rate of 11.6 per cent. If we compare the export performance of India with that of China. South Korea and even Mexico, the achievement attained by India cannot be considered as significant.

Table 7.8 reveals that the share of China in world exports increased from 1.59 per cent in 1990 to 5.20 per cent in 2003 as a result of rise in the volume of its exports by 714 per cent. Similarly, South Korea and Mexico had also shown significant improvement in its share of world exports from 1.74 per cent to 2.42 per cent and from 1.13 per cent to 1.91 per cent respectively during the period 1990-03.

But the India’s share of world export shown a marginal improvement from 0.53 per cent to 1.01 per cent during the same period. Thus we find that India’s export performance was lagging far behind that of China.

Under the present context, a question that arises is that why India’s share of world exports failed to increase at a sharp rate? While answering this question we could observe that in absolute terms Indian export effort yielded some positive result and accordingly Indian exports have increased from US $ 18.1 billion in 1990-91 to US $ 26.3 billion in 1994-95 and then to US $ 35.0 billion in 1997-98 and finally to US $ 43.8 billion in 2001-2002.

But, the total value of Indian exports (both merchandise and services) increased from US $ 22.5 billion in 1990 to US $ 93.7 billion in 2003. But the export performance of the country would have been improved further if the globalisers did not followed the policy of protection on some cheap pretext like declaring Indian skirts as inflammable by USA, banning of azo dyes, imposition of anti-dumping duties etc. Thus such act of protectionism has been hitting our textile industry considerably.

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Moreover, linking of labour standards with trade by the developed countries like USA on the pretext of use of child labour has also compounded the problem of exports in India. Unable to face competition from Indian products, developed countries have adopted a new term “social clause” to beat India’s claim. But multinational companies (MNCs), especially from USA, having their advantageous position in telecommunications, insurance sector etc. are arguing for opening up the domestic market of the country for their smooth entry.

(vii) Greater Increase in Imports than Increase in Exports:

Globalisers were of the view that Indian exports would increase at faster rate than that of imports. Unfortunately, things are not moving in that direction. Indian exports which was 7.3 per cent of GDP in 1991-92 rose to 9.1 per cent of GDP in 1995-96, declined to 8.4 per cent of GDP in 1999-2000 and reached the level of 15.0 per cent of GDP in 2006-07.

But the volume of imports in India as percentage of GDP rose from 8.3 per cent in 1991-92 to 12.3 per cent in 1995-96 and then to 22.2, per cent in 2006-07-. This shows how the access to foreign markets by Indians is growing slowly as compared to the entry of foreigners in our domestic market.

It is also observed that India’s trade deficit during the period 1996-97 to 2000-01 ranged between 3.1 per cent to 4.0 per cent of GDP. But the same deficit declined to 2.6 per cent and 2.5 per cent of GDP during 2001-02 and 2002-03 respectively. But in 2004-05, the same trade deficit increased considerably to 5.3 per cent of GDP. This simply shows that the access of Indian markets by the foreign producers has been increasing.

(viii) Slower GDP Growth Rates:

In-spite of high expectation that globalisation would facilitate attaining of higher GDP growth rate through export-led growth but that expectation has failed to materialize. Although in the initial years of globalisation, the GDP growth rates gradually rose from 5.2 per cent in 1992-93 to 8.2 per cent in 1996-97 hut since then it gradually declined to 4.6 per cent in 1997-98, 6.2 per cent in 1999-2000 and again declined to 4.2 per cent in 2000-01 and 6.2 per cent in 2001-02 and finally to 3.5 per cent in 2002-03.

Thus the sluggish GDP growth rates experienced by Indian economy has reflected the failure of the policy of globalisation introduced in the country in raising its GDP growth rates and also raised its dependency burden on world economy. However, the GDP growth rates in India started to show an increasing trend in recent years, i.e., from 8.8 per cent in 2003-04 to 9.1 in 2005-06 and then to 9.2 per cent in 2006-07.

(ix) Foreign Investment Flows:

The advocates of globalisation has been claiming that globalisation would pave the way for greater inflow of foreign investment. But things are not moving in a right direction. Foreign investment usually enters in two forms—Foreign direct investment and Foreign Portfolio investment.

However, the FDI enhances the productive capacity and investment of the country but the portfolio investment encourages speculation activities. During the period 1990- 91 to 1994-95, the share of FDI was 24.2 per cent and that of Portfolio (FPI) investment was as high as 75.8 per cent. During the subsequent period, i.e., during 1995-96 to T999-2000, the share of Portfolio investment has declined to 45.2 per cent and the share of FDI has increased to 54.8 per cent.

Again during the period 2000-01 to 2005-06 the share of FDI has again declined to 46.1 per cent and the share of FPI has increased to 53.9 per cent. During the next 6-year period, i.e., from 2000-01 to 2005-06, the share of FDI again declined to 46.1 per cent and the share of FPI further increased to 53.9 per cent. Moreover, from the year-wise data of foreign investment as shown in table 7.9 reveals that the fluctuation in the flow of foreign portfolio investment is much sharper than foreign direct investment.

It is observed from the table that FPI flow to India declined from $ 3,824 million in 1994-95 to a negative level of (-) $ 61 million in 1998-99 and then again increased to $ 3026 million in 1999- 00. The flow of FPI again declines to $ 979 million (16.3 per cent) in 2002-03 and then again increased to $ 11,377 million (72.5 per cent) in 2003-04 and then to $ 12,492 million (61.8 percent) in 2005-06. Thus the flow of FPI shows an erratic behaviour.

On the other hand, the flow of FDI shows a slow but gradual, upward growth from $ 97 million in 1990-91 to $ 3,557 million in 1997- 98 and then to $ 6,130 million in 2001-02 and then finally to $ 7,722 million in 2005-06. Accordingly, total flow of foreign investment into India increased from $ 133 million in 1991-92 to $ 6,133 million in 1996-97 and then fell to $ 2,401 million in 1998-99 and then gradually increased to $ 6,014 million in 2002-03 and then to $ 20,214 million in 2005-06.

Thus in recent years, the proportion of FPI in total foreign investment is still very high. Again total average inflow of foreign investment into India during 1995-96 to 2000-01 was only $ 4.85 billion as against its target of $ 10 billion. Thus the expectation of the country in respect of entry of foreign investment as a result of globalisation has not been fulfilled. Moreover, there is a peculiar tendency where there remains a wide gap between the level of foreign investment approved and its actual inflow.

(x) Slowing Down of the Process of Poverty Reduction and Growing Inequality:

Reduction of poverty is one of the important objectives of development. But in modern times the pace of poverty reduction is gradually slowing down. A World Bank paper prepared by Gaurav Dutt, Valerie Kozel and Martin Ravallion entitled “A Model-Based Assessment of India’s Progress in Reducing Poverty in the 1990s” observed that the key determinants of the poverty reduction rates at the state level are agricultural yields, growth of non-farm sector, development expenditure and the rate of inflation.

The main findings of this model is that the rate of poverty reduction in the 1990s is slightly less than that of 1980s. The reason behind this slow pace of poverty reduction is the pattern of growth that has been achieved following the policy liberalization, privatisation and globalisation. Such a growth pattern has affected geographical distribution.

The globalisation has helped the industrially advanced states much more than the less industrialized states and also neglected agricultural sector leading to a skewed pattern of distribution in this post-reform period.

Thus the paradox of attaining higher growth rate of GDP and lower rate of poverty reduction is mostly resulted from unequal distribution of income between the richer section and the marginalized section of the population. Besides, this slow decline in poverty reduction is mostly resulted from the geographical pattern of growth promoted by the policies of liberalization, privatisation and globalisation.

As a result of globalisation industrialized states are getting more benefit as compared to that of less industrialized and agriculturally based states leading to a geographical skewed pattern of growth attained during this post-globalisation period. Moreover, globalisation has also resulted significant rise in rural-urban inequalities throughout the country and a sharp increase in the differences in wage/ salary incomes between the urban and the rural sector. Thus globalisation has been resulting widening inequality growing concentration of wealth and attainment of slower rate of poverty reduction in the country.

(xi) Fall in Employment Growth Rates:

Globalisation has resulted in a fall in the employment growth rates. The annual growth rate of employment which was 2.04 per cent during the period 1983- 94, but the same rate declined to a mere 0.98 per cent during the period 1994-2000. As a result, the unemployment growth rates increased from 5.99 per cent in 1993-94 to 7.32 per cent in 1999-2000.

This was despite the fall in the growth rate of labour force from 2.43 per cent during 1983-1994 to 1.31 per cent during 1993-2000. Such a situation is mostly resulted from the deceleration in employment growth rates in agriculture and community and personal services. These two sectors contributed jointly around 70 per cent of total employment generated but they virtually failed to record any growth in employment.

Thus after making a review of performance of the economy for a decade after the introduction of globalisation, it is observed that the policy of globalisation has not been able to bring the required benefits to the people in general in terms of basic macro indicators such as GDP growth rates, employment generation, reduction of poverty, hike in investment, boost in merchandise exports. It is only in respect of services export India has been able to record marginal gain due to its cheaper manpower resources.

Moreover as a result of globalisation, a good number of small and medium scale enterprises had to face closure due to unequal competition leading to loss of employment to a good number of workers engaged in these industrial units. World Commission on Social Dimension of Globalisation (2004) unambiguously observed, “The goal of full employment and achieving decent work for all receives low priority in current international policies.”………. “There is no point to a globalisation that reduces the price of child’s shoes but costs the father his job.”

Thus globalisation has also failed to look fairly at the small enterprises, rural and informal sectors from where majority of people earn their livelihood. Thus under the present scenario, important steps need to be taken for integrating the growth objective with that of employment objective.

(xii) Growth of TNCs:

In its study on the progress of the corporate sector in recent years, the Institute for Studies of Industrial Development (ISID) has reported the impact of growth of 100 (top) TNCs in the post-reform period. It is further observed that the annual growth rate of profits before lax of these top 100 TNCs during the period 1991-92 to 1995-96 was 23.8 per cent.

Such enormous profits earned by TNCs will create an adverse impact on the balance of payments. While the exports to turn over ratio of these companies grow slowly from 8.1 per cent to 8.6 per cent during the period under reference but the import to turn-over ratio of these TNCs increase considerably from 6.9 per cent to 12.9 per cent during the same period. Accordingly, such workings of the TNCs has converted a net export position of Rs. 270 crore in 1991-92 to a net import position of Rs. 1,587 crore in 1995-96.